Section 3(1) of the Employee Retirement Income
Security Act of 1974 (ERISA) defines the term "employee welfare benefit plan"
in relevant part to mean "any plan, fund, or program . . . established or
maintained by an employer . . . to the extent that such plan, fund, or program
was established or is maintained for the purpose of providing for its
participants or their beneficiaries, through the purchase of insurance or
otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in
the event of sickness . . . ."

Section 1201 of the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003, Pub. L. No. 108-173 (the Medicare
Modernization Act), added section 223 to the Internal Revenue Code (Code) to
permit eligible individuals to establish Health Savings Accounts (HSAs).(1) In general, HSAs are established to receive
tax-favored contributions by or on behalf of eligible individuals, and amounts
in an HSA may be accumulated over the years or distributed on a tax-free basis
to pay or reimburse "qualified medical expenses." In order to establish an HSA,
an eligible individual, among other conditions, must be covered under a High
Deductible Health Plan (HDHP).(2)
Contributions to an HSA established by an eligible individual who is an
employee may be made by the employee, the employee's employer or both in a
given year.(3) Amounts in an HSA may be
rolled over to another HSA.(4) If an employer
makes contributions to HSAs, the employer must make available a comparable
contribution on behalf of all eligible employees with comparable coverage
during the same period.(5) However, employers
that make contributions to an employee's HSA are not responsible for
determining whether HSAs are used for qualified medical expenses or for
investing or managing amounts contributed to an employee's HSA.(6)

It is our understanding that a number of employers
that currently sponsor ERISA-covered group health plans may wish to add an HDHP
option and offer programs designed to enable employees to establish HSAs to pay
for medical expenses not covered by the HDHP. Questions have been raised about
whether, and under what circumstances, HSAs established in connection with
employment-based programs would constitute "employee welfare benefit plans"
within the meaning of section 3(1) of ERISA.

Congress, in enacting the Medicare Modernization
Act, recognized that HSAs would be established in conjunction with
employment-based health plans and specifically provided for employer
contributions. However, neither the Medicare Modernization Act nor section 223
of the Code specifically address the application of Title I of ERISA to
HSAs.
Based on our review of Title I, and taking into account the provisions of the
Code as amended by the Medicare Modernization Act, we believe that HSAs
generally will not constitute employee welfare benefit plans established or
maintained by an employer where employer involvement with the HSA is limited,
whether or not the employee's HDHP is sponsored by an employer or obtained as
individual coverage.

Specifically, HSAs meeting the conditions of the
safe harbor for group or group-type insurance programs at 29 C.F.R. §
2510.3-1(j)(1)-(4) would not be employee welfare benefit plans within the
meaning of section 3(1) of ERISA.(7)
Moreover, although contributions or payment of group insurance premiums by an
employer would be a significant consideration in determining whether a group or
group-type insurance arrangement is an employee welfare benefit plan under
section 3(1), such contributions or payments are not necessarily significant in
analyzing the status of HSAs under ERISA. As noted above, HSAs are personal
health care savings vehicles rather than a form of group health insurance. For
example, funds deposited in an HSA generally may not be used to pay health
insurance premiums,(8) and the beneficiaries
of the account have sole control and are exclusively responsible for expending
the funds in compliance with the requirements of the Code. Because of these
differences, we regard court precedent on the significance of employer
contributions to group or group-type insurance arrangements as inapposite to
HSAs. In the group health insurance context, the employer, whether by choosing
an insurance policy or creating a self-funded program, typically establishes
the type of benefits provided, the conditions for their receipt, and the manner
in which claims will be adjudicated. In the context of HSAs, however, the
employer may be doing little more than contributing funds to an account
controlled solely by the employee.

Accordingly, we would not find that employer
contributions to HSAs give rise to an ERISA-covered plan where the
establishment of the HSAs is completely voluntary on the part of the employees
and the employer does not: (i) limit the ability of eligible individuals to
move their funds to another HSA beyond restrictions imposed by the Code; (ii)
impose conditions on utilization of HSA funds beyond those permitted under the
Code; (iii) make or influence the investment decisions with respect to funds
contributed to an HSA; (iv) represent that the HSAs are an employee welfare
benefit plan established or maintained by the employer; or (v) receive any
payment or compensation in connection with an HSA.

The mere fact that an employer imposes terms and
conditions on contributions that would be required to satisfy tax requirements
under the Code or limits the forwarding of contributions through its payroll
system to a single HSA provider (or permits only a limited number of HSA
providers to advertise or market their HSA products in the workplace) would not
affect the above conclusions regarding HSAs funded with employer or employee
contributions, unless the employer or the HSA provider restricts the ability of
the employee to move funds to another HSA beyond those restrictions imposed by
the Code.

HSAs generally will not constitute "employee
welfare benefit plans" for purposes of the provisions of Title I of
ERISA.
Employer contributions to the HSA of an eligible individual will not result in
Title I coverage where, as discussed above, employer involvement with the HSA
is limited. Finding that an HSA established by an employee is not covered by
ERISA does not, however, affect whether an HDHP sponsored by the employer is
itself a group health plan subject to Title I. In fact, unless otherwise exempt
from Title I (e.g., governmental plans, church plans) employer-sponsored HDHPs
will be employee welfare benefit plans within the meaning of ERISA section 3(1)
subject to Title I.

Questions concerning this matter may be directed
to Suzanne Adelman, Division of Coverage, Reporting and Disclosure at
202.693.8523.

The U.S. Department of the
Treasury and the Internal Revenue Service (IRS), which have interpretive and
regulatory authority over HSAs under section 223 of the Code, issued general
guidance concerning HSAs on December 22, 2003, in I.R.S. Notice 2004-2, and
issued additional guidance on March 30, 2004, in I.R.S. Notice 2004-23, I.R.S.
Notice 2004-25, Revenue Ruling 2004-38, and Revenue Procedure 2004-22. The
Treasury/IRS guidance is available on the Internet at
www.treas.gov/offices/public-affairs/hsa.

See I.R.S. Notice 2004-2,
Q&A Nos. 1 and 2.

Id. Q&A No.
11.

Id. Q&A No.
23.

Id. Q&A No.
32.

Id. Q&A No.
30.

Regulation section 2510.3-1(j)
excludes from Title I coverage certain group or group-type insurance programs.
In general, such programs are excluded from coverage where there are no
employer contributions, employee participation is voluntary, the employer does
not endorse the program, and the employer receives no consideration in
connection with the program, other than reasonable compensation for
administrative services actually rendered in connection with payroll
deductions. See also 29 C.F.R. § 2509.99-1 relating to payroll deduction
IRAs.

Although the Medicare
Modernization Act excludes health insurance from the qualified medical expenses
that may be paid from an HSA, there are exceptions for the payment of COBRA
premiums, certain insurance for individuals over 65, long-term care insurance
premiums and health insurance during periods of unemployment. Code section
223(d)(2).